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Setting up as a Sole Trader

Becoming a sole trader is the simplest way in which you can trade. 

To register as self employed, all you have to do is to let HM Revenue and Customs know by going online and filling in the 'Becoming self-employed and registering for National Insurance contributions and/or tax' form or by completing a CWF1 form within three months of you setting up. This is so that they can send your quarterly bills for Class 2 National Insurance, insuring that your state pension is not adversely affected in any way in the future.

As a sole trader you will need to do a number of things:

  1. Keep all of your invoices to clients and any receipts for business expenses for six years.
  2. Keep a full record of the money you have earned each year, and all business expenses. It is a good idea to do this from Day One anyway as you will need these figures for your end of year accounts!
  3. After the end of the tax year, which is 5th April, you then have to complete a Personal Tax Return which declares your business profit – which is, in effect, your income or ‘payment’ for the year. This is the figure you will be taxed on and you are responsible for your own Self Assessment Tax and Class 4 National Insurance contributions.

Using an accountant will ensure that you do not put yourself at risk to the various HMRC penalties and end up having to pay interest that is charged for late registration, late submission of tax returns and late payments of tax. Easy Accountancy offers freelancers who choose to operate as a sole trader an all-inclusive, fixed-free accountancy package of £30 plus VAT per month. This includes unlimited access to your very own accountant via telephone or email throughout the year for help and advice.

The Basics

REGISTERING YOUR BUSINESS NAME
As a sole trader you do not have to register your company name in the same way as you would have to if you were setting up a limited company. This means that technically you can choose pretty much any name you like, but if you do want to register the name as a formal business entity in the future there will be some restrictions – so even if you are only setting up as a sole trader now, you might want to register your name straight away, to protect it in the future in case you do choose to go limited at a later date. Also, by registering your name you will make your details present on Companies House, which provides credibility and helps to build client confidence.

SETTING UP A BUSINESS BANK ACCOUNT
Again, you do not have to set up a business bank account, but most sole traders choose to do so. It is a good idea to keep your personal and your business finances separate, as it simplifies everything and makes it clearer to see what funds are where! 

SORTING YOUR NATIONAL INSURANCE
As soon as you decide to set up a freelance business, whether full or part time, you need to let HMRC know by completing the relevant form, and they will send you a quarterly bill for what is known as ‘Class 2’ National Insurance. This is a basic payment which ensures that you pay enough to cover your future state pension requirements. All additional National Insurance payments (Class 4) are calculated by your accountant when your end of year figures are completed, and the amount owed is included in your tax bill.

If you have income from more than one job i.e. you are freelancing whilst still in permanent employment you should take care to ensure you are not paying more in NI contributions than you need to! If you think you may be exceeding the upper limit then you can apply for deferment of contributions.

VAT
You will not need to register for VAT unless you hit the VAT threshold, which is currently £68,000 for the year commencing April 1st 2009.

Even if below the threshold, many people choose to register for VAT to give their business more ‘kudos’ with customers, or simply to make it appear larger than it really is.

If you do choose to register for VAT then there is the advantage of being able to claim the VAT back on everything you purchase for the business, but the ultimate benefit of this will depend on the type of business you have. If you buy things in and sell them on as part of your business function then it will be an advantage!

Flat Rate VAT

Instead of registering for the standard VAT scheme (outlined above), it may be more beneficial for you to register for the Flat Rate VAT scheme.

Within this scheme, you charge your clients at the standard rate and pay the government at a lower rate of the gross amount. Different sectors have different rates (call us to find out what rate you might be in). 

Find below an example for an IT professional whose flat rate is 12% in their first year (new companies get a 1% first year discount):

Amount you invoiced -                      £50,000 plus 17.5% VAT £8,750
Total amount received -                   £58,750
VAT paid to HMRC -                          £58,750 * 12% = £7,050
(flat rate example of 12%)

The difference between the VAT invoiced (£8,750) and the flat rate paid back to HMRC (£7,050) is yours to keep as profit!

£8,750 - £7,050 = £1,700

You’ll need to speak to an accountant before you decide which scheme is best for you. They’ll be able to work out the most tax efficient way to pay VAT.

The reason for this is that the Flat Rate scheme simplifies VAT administration for HMRC and so the financial benefit is passed on, to a point. The rate you pay will vary depending on your business type and when you register for VAT this will be assessed and agreed up front.

MAKING SURE YOU CAN PAY YOUR TAX BILL
If you are operating as a limited company, then there are very specific limited company tax rules. However, if you are operating as a sole trader then it’s all a lot more flexible. You will need to pay tax twice a year, on 31st January and 31st July via what is known as ‘payments on account’, and your accountant will be able to advise you on this.

At the end of the tax year (5th April) you will need to provide your accountant with a full set of income and expenditure figures. From these, they will be able to work out your tax liability and will tell you what your payments on account will be for the following year. You will still need to fill in a normal personal tax return (this is included in Easy Accountancy’s fully inclusive freelancers £30 per month service). The timescales for completion of the tax return are the same as for an individual – but the sooner you do it after 5th April, the sooner you will have an exact tax liability figure for the following year.

As a general rule of thumb, if you put 30% of everything you earn to one side, this should cover you for tax and national insurance, but you will be able to adjust this over time as you get a feel for your likely tax bills. Don’t however make the mistake of not putting anything aside, as you will be in for a nasty shock when the bill comes in!

CLAIMING FOR EXPENSES
Basically, anything which is a business cost is tax deductible. For example:

  • Stationery
  • IT equipment
  • Premises rental
  • Internet access
  • Business phone bills
  • Travel to customer premises e.g. train ticket
  • Motor expenses (if you use your vehicle for both personal and business use then you simply reclaim VAT that relates to your business usage).

MORTGAGES FOR FREELANCERS AND SOLE TRADERS
In the past, freelancers and sole traders have typically faced significant difficulties when it came to applying for mortgages. However, with time, mortgage lenders have become somewhat more relaxed about granting mortgages for freelancers and sole traders. Most mortgage brokers charge a fee for their services which can be as much as 1-2 % of the loan. Easy Accountancy have arranged a special offer with freelancer mortgage specialists, ContractorMoney, and visitors to our website will not be charged a penny.

FREELANCER INSURANCES
This may or may not be relevant to you, depending on what type of sole trader or freelancer you are. There are many different types of insurance which you might want to consider, the most vital being professional indemnity and public liability insurance. On top of this, you may also want to think about some type of insurance to cover you for lost earnings if you cannot work through illness or injury. Freelancers and sole traders have no sick pay to fall back on!

In general, insurance policies of this type are far less expensive than you might expect, although costs do depend on individual circumstances, specifically the annual turnover of your company and the nature of your business. For more details on what insurances you need to consider look at our Freelancer Insurances section.

If you have any questions about becoming a freelancer then contact our New Client Services team on 0500 234111 / 01442 275767.

You may also find the following pages useful:

Easy Accountancy

Easy Accountancy is the UK’s only national specialist accountancy firm for freelancers, sole traders and small businesses

If you’ve just started out as a freelancer or run a small business, you’ll definitely need a small accountant and there are plenty of options out there! However, most accountants will charge you every time you get in touch with them; for every phone call, email or meeting.

We don’t want our clients to be scared to contact us and potentially lose out on valuable tax saving advice. It's even more important when you first start out as you really need to set your business up in the best way possible. As a start up you’ll probably have loads of questions and will really appreciate the fact you can call your accountant as many times as you like without the fear of racking up large bills.

Our low cost, all-inclusive fixed-fee accountancy service includes unlimited access to your own accountant throughout the year, so you never need to worry about picking up the phone and then receiving a bill afterwards for the privilege, and covers all your business and personal tax affairs needs. All clients additionally receive: 

  • Help to run your business in the most tax efficient way possible
  • Help so you can understand the taxes you need to pay
  • Advice on the best ways to manage your business
  • Updates and reminders so you'll never miss a deadline
  • Help to ensure you maximise your tax allowances
  • Provide proactive tax advice throughout the year

We’ve saved our clients up to half on their accountancy bills – if you’d like a quote click on the quote me button to the right of this page. Alternatively, call us on 0500 234111 / 01442 275767 or email aaron.oneill@easyaccountancy.co.uk

We also have a money-back service guarantee - all of your telephone calls and emails will be answered on the same day, or we will refund your monthly fee (another first within the accountancy world).

To appoint us as your accountants, please fill in our Client Agreement Form online.

If you are a contractor working through a limited company then visit SJD Accountancy (our sister company) who specialise in providing tax advice and accountancy services for Limited Company contractors. You can also keep up to date by following the SJD Accountancy Twitter

You may also find the following pages helpful:

Easy Accountancy

Easy Accountancy is the UK’s only national specialist accountancy firm for freelancers, sole traders and small businesses

If you’ve just started out as a freelancer or run a small business, you’ll definitely need a small accountant and there are plenty of options out there! However, most accountants will charge you every time you get in touch with them; for every phone call, email or meeting.

We don’t want our clients to be scared to contact us and potentially lose out on valuable tax saving advice. It's even more important when you first start out as you really need to set your business up in the best way possible. As a start up you’ll probably have loads of questions and will really appreciate the fact you can call your accountant as many times as you like without the fear of racking up large bills.

Our low cost, all-inclusive fixed-fee accountancy service includes unlimited access to your own accountant throughout the year, so you never need to worry about picking up the phone and then receiving a bill afterwards for the privilege, and covers all your business and personal tax affairs needs. All clients additionally receive: 

  • Help to run your business in the most tax efficient way possible
  • Help so you can understand the taxes you need to pay
  • Advice on the best ways to manage your business
  • Updates and reminders so you'll never miss a deadline
  • Help to ensure you maximise your tax allowances
  • Provide proactive tax advice throughout the year

We’ve saved our clients up to half on their accountancy bills – if you’d like a quote, click on the quote me button to the right of this page. Alternatively, call us on 0500 234111 / 01442 275767 or email aaron.oneill@easyaccountancy.co.uk

We also have a money-back service guarantee - all of your telephone calls and emails will be answered on the same day, or we will refund your monthly fee (another first within the accountancy world).

To appoint us as your accountants, please fill in our Client Agreement Form online.

If you are a contractor working through a limited company then visit SJD Accountancy (our sister company) who specialise in providing tax advice and accountancy services for Limited Company contractors. You can also keep up to date by following the SJD Accountancy Twitter

You may also find the following pages helpful: